…..And So For The Inevitable….

I sit here pondering over the breaking news of Glasgow Rangers and their lodging of papers aiming in the direction of Administration. It was an inevitable move that was more a question of ‘when’ as opposed to ‘if’. Even the most hardline Rangers fans have taken to the news with no sense of shock,surprise or horror. More with a general distain and lackluster regret.

Why should anyone be surprised. In September last year Levy & McRae suggested that they had real fears about Rangers solvency. Add a further £20+million debt from, ‘Ticketus’ and the outcome was almost telegraphed.

Only last month the club was forced to stop trading on their shares due to the fact they had not released any auideted accounts….. of course Admin was the next step.

So what does lodging these papers at the Court of Session mean? Well, in basic terms it gives Rangers a further 10 days to confirm the appointment of an administrator. Within this ten day period Rangers must discuss with their creditors a way of dealing with their debts in attempt to reach agreement. If Rangers fail to achieve such (as i fully expect) then Rangers will go into Administration an be deducted 10 of their finest points by the SPL. Not that this will matter one bit however the principle is one of strict liability in the SPL rule book – an automatic deduction of points.

What i will say is this: with the news of such papers being filed i would take one wild guess that the result of the Tax Tribunal will be heard very soon. I suggested on this page ‘within 28 days’ on Saturday. I stand by such.

Surely it is only a matter of time before someone asks: Was this all a plan to defraud ‘Ticketus’ of much dough?……very liable statement.

But why so soon? That is the big question that i fail to answer. £24+ million from ticketus, £15+million season ticket money, £6million Jelavic, plus any money Craig Whyte has to inject as part of the takeover deal. Craig Whyte claims that it cost £45million to run Rangers – so why, after only 9 months, has this money run dry? It doesn’t make sense.

The news comes on the same day that Peter Lawwell announced that Celtic’spre-tax profits have fallen from £7million to just £180’000. THhere can be many reasons for this but the outcome is the same – no matter how much it is dressed up, it is hardly promising news. Interesting then that it be announced on the same day that Rangers enter administration. A classic tactic of it being ‘ a good day to sneak out some bad news’.

What happens when a club is in administration and all goes well??

What happens when a club wants to exit administration?

A Company Voluntary Arrangement (CVA) is drafted for a club to try and reach an agreement with its creditors. Clubs must agree with those it owes money to over how much to pay back, and over what period of time.

Everyone who is owed money is then invited to vote on the proposal. A ‘yes’ vote is required from creditors up to 75% of the value of the overall debt. For example, if total debt is £10 million, the company must receive the backing from creditors to the tune of £7.5 million.

How long does it take before the club is out of administration?

If a CVA is approved, creditors have a period of 28 days to register their opposition to the decision.

If there is no opposition, the club exits administration and continues in its current form, paying back its creditors over the agreed period of time.

What if a club fails to reach an agreement?

A club may try again to reach a satisfactory agreement with its creditors. But, if is unable to agree a deal, the company will be dissolved and the club will cease to exist.

There is an alternative for football clubs. As was the case in England with Leeds United, the insolvent company can create a “phoenix” club and attempt to transfer every part of the club to a new business, leaving behind the debt.

So what is administration?

I have written extensively on recievership – admin and liquidation before but i will bring in the admin part for those interested:

The Enterprise Act 2002 brought about a shift in the balance of insolvency procedures in favour of administration, with the aim of taking account of the interests of all creditors, as contrasted with the old receivership rules which in essence sought to protect the interests of the floating charge holder only. Administration is now the rescue vehicle of choice, as opposed to receivership and/or liquidation. Administration is also the only option as from September 2003 now for secured creditors wishing to enforce their security.

(ii) entering into a section 425 CA 85 compromise or scheme of arrangement with the company’s creditors

(iii) approval of a voluntary arrangement, or

(iv) a more advantageous realisation of the company’s assets than there would be on a winding up.

The Enterprise Act 2002 replaces these four purposes with one overarching purpose, which is divided into 3 objectives. These objectives require to be followed in order. They are hierarchical:

(i) the rescue of the company as a going concern is the primary objective.

(ii) If that is not possible, or if the second objective would clearly be better for the creditors as a whole, then the administrator has to attempt to achieve a better result for the creditors than would be obtained through an immediate winding-up of the company – under this objective the administrator would have the authority to trade on for a while and thereafter sell the business as a going concern.

(iii) if neither of these two objectives are possible then and only then the administrator can realise the company’s property in order to make a distribution to the secured and/or preferential creditors.

Previously an administrator was under an obligation to stipulate which of the 4 purposes under the 1986 Act they were going to pursue before the company entered administration. Under the 2002 Act an administrator, once appointed, if they have to realise property – the third objective – must explain why this result cannot be achieved by either the second and/or first objective.

Methods of Commencing the Administration

Under the 2002 Act two methods of proceeding to administration are permitted. As well as the court order entry into administration, the 2002 Act has introduced a ‘without court order’ appointment route for holders of “qualifying floating charges” and for companies, or their directors. Didn’t Craig Whyte have a floating charge? Yet Rangers Lawyers filed at the court?

If a company, or its directors seek to appoint an administrator, this can only be processed under the non-court route, if the company has not had the benefit of a moratorium (or interim moratorium) within the previous 12 months.

The court route will be necessary if the company is in liquidation, where the court can end the liquidation and make an administration order instead, or if a receiver has already been appointed, or if a provisional liquidator has been appointed, or if there is an outstanding winding up petition against the company.

There is an immediate 5 day moratorium for out of court appointments by qualifying charge holders, starting with the date of the notice of intention to appoint the administrator is served. During that period the appointment requires to be made and if not, whilst it will still be possible to appoint an administrator at a later date the interim moratorium will be lost. Once the moratorium is effective, a petition for liquidation cannot be presented.

Where the application is by the company or the directors there is again a moratorium effective from the date of filing the notice of intention to appoint the administrator with the court. In this instance the administrator cannot be appointed within the first 5 days but must be appointed within 10 days of the filing of the notice.

Interesting to read that the BBC and ITV have both suggested different time frames of 5 and 10 days for administration!! Quickfire reporting on bad advice.

Restrictions on company/ director induced administrations

In certain situations it will not be possible for either the company, or its directors to seek to commence an administration, namely where:

(b) a petition to liquidate the company has not been fully disposed of;

(c) another petition for administration has not been fully disposed of; and

(d) a receiver is already in office

Irrespective of which manner of appointment is selected the administrator will still be considered as an officer of the court and the appropriate documentation will need to be filed with the court. The administrator requires to complete a form, detailing their acceptance of the appointment, and they must also disclose whether or not they have had any prior professional dealings with the company concerned (this is to avoid potential claims of conflict of interest), together with their opinion on whether or not the purpose of the administration is likely to be achieved. The appointment however will only be deemed to be effective from the date and time that the notice of appointment was filed with the appropriate court.

The petitioner, unless they are a qualifying charge holder, requires to provide a statement regarding their belief that the company is unable to settle its debts, together with an affidavit setting out the company’s financial position.

Where a floating charge holder seeks to appoint an administrator, they are required to give notice of this only to the holders of any prior floating charges, who must consent to the appointment, or make alternative arrangements to appoint their own choice of administrator. There is no requirement on the floating charge holder to notify anyone else of the intended appointment of the administrator.

Where the company or its directors seek the appointment then again the holders of all qualifying floating charges must be given notice of the intention to appoint the administrator, and the charge holders will be entitled to appoint their own administrator if that is what they want to do – they in effect have a preference of choice over the company through its shareholders or the directors.

What is a qualifying floating charge?

The charge document must state that it is a qualifying charge and that it“empowers the holder of the floating charge to appoint an administrator”.

2.6 Who can be a qualifying floating charge holder?

To qualify as such one must hold one or more debentures secured in one of the following manners, namely:

(i) by a qualifying floating charge over the whole or substantially the whole of the company’s assets;

(ii) through a number of such qualifying charges which relate to the whole or substantially the whole of the company’s assets;

(iii) through charges and other forms of security that encompass the whole or substantially the whole of the company’s assets, and at least one of the charges is a qualifying charge.

This net result of the above conditions is that a security holder who only holds a fixed security cannot appoint an administrator.

Procedure after the Appointment

Following their appointment the administrator needs to ensure that all further communications from the company disclose the fact that the company is in administration and notify as soon as possible all creditors of the appointment. There is a requirement to advertise the appointment, either in the London or Edinburgh Gazette (dependent in which jurisdiction the registered office of the company is situated), and at the same time in a relevant newspaper – one that the administrator considers appropriate for ensuring that the appointment will come to the notice of the company’s creditors.

Similar to the procedure under the old style receivership rules, the administrator is required to obtain a “statement of affairs” from the company officers or its employees. The statement is in a prescribed form, which details the company’s assets and liabilities, including those assets that are subject to any fixed or floating charges. Thereafter the administrator is required to produce proposals to satisfy one of the three objectives for administration.

These proposals require to be submitted to Companies House, the shareholders and the creditors within 8 weeks of the commencement of the administration. These proposals will detail how the company came to be in administration, how it is coping with the administration and the administrator’s opinion on how matters will progress. The administrator must explain their decision on how the company will fare.

The prime objective of an administrator is to rescue the company as a going concern with all or most of its businesses intact. If however the prime objective is not reasonably practicable, the administrator must consider the second objective, namely to seek a better result for the company’s creditors as a whole than would otherwise be achieved if the company went straight into liquidation. This in effect means that there is now an onus on an administrator to display greater transparency in decision making, with a need to explain to creditors in his statement of proposals why it was not reasonably practicable to pursue the first objective.

If it is not reasonably practicable to achieve either of the first two objectives, the administrator’s objective will be to realise the company’s property in order to make a distribution to the secured or preferential creditors. The administrator will however still have to act in a way that does not unnecessarily harm the interests of unsecured creditors. The administrator has to explain his actions to all creditors, whether secured or not, in his statement of proposals why it was not reasonably practicable to pursue the first two objectives. As to whether or not a particular course of action was or was not reasonably practicable is a matter for the commercial judgement of the administrator.

Included with each creditors’ copy of the administrator’s proposals will be an invitation to the initial creditors’ meeting, at which meeting the creditors are entitled to vote on those proposals. This meeting must be held within 10 weeks of the date the company entered into administration, and the creditors must be given at least 2 weeks’ notice of the meeting, although these time limits can be extended by the creditors and/or the court.

The business of the creditor’s meeting can be carried out by correspondence. However if 10% or more of the creditors (based on the value of claims and not the number of creditors) demand a meeting, then the administrator must call one. The administrator’s proposals can be accepted by a majority vote (again based on the value of claims), or they can be modified and then accepted, or the creditors, if they so choose, can reject the administrator’s proposals. Following that initial meeting, and any subsequent creditors’ meeting, the administrator must send a report of the outcome of the meeting in a prescribed form to each creditor, to the court and to the Registrar of Companies.

Thereafter the administrator must manage the company’s affairs, business and property in accordance with the proposals agreed to at the creditors’ meeting. If the administrator wishes to change the accepted proposals, and he is of the view that such a change would be a substantial revision, then he must send out revised proposals to all the creditors and obtain approval of those revised proposals, again either at a creditors’ meeting or by correspondence.

The administrator is also required, under the Company Directors Disqualification Act 1986, to submit a conduct report to the Secretary of State for Trade and Industry on the conduct of each director and/or former director of the company within 6 months of the company entering administration. This report may then be used in proceedings against the directors to decide if they should be disqualified from being a company director.

Time Periods for Administration

Under the 1986 Insolvency Act administrations could be open-ended. The 2002 Enterprise Act introduced an overall time limit of 1 year for concluding an administration, although this time period can be extended with the consent of the creditors and/or by the court. In practice it is unlikely that an administration would end within 12 months, and where it does need to continue for longer the administrator must take steps to ensure that an extension is arranged, either through the consent of the creditors or by obtaining the appropriate court order, otherwise the administration will cease. Positive action is therefore required on the part of the administrator to ensure that the administration continues, subject to it complying with the prime objective.

The time-limits for the administrator getting proposals out to creditors and thereafter holding the initial creditors’ meeting have been shortened from 10 to 8 weeks, although again there is the possibility of these time limits being extended with the creditors’ consent and/or by the court.

Prior to 15/09/03 administrations ended with a company moving into another form of proceedings, most commonly a company voluntary arrangement or a compulsory liquidation. The Enterprise Act has introduced definite time periods, which allow the administrator to move the company straight from administration into a creditors’ voluntary liquidation, if there are assets to be distributed to unsecured creditors, or to dissolve the company if there is no property left to distribute to creditors. These events can occur following on registration of the relevant notice with Companies House.

Duties and Powers of the administrator

The administrator, as an agent for the company, can do “anything expedient for the management, affairs, business and property of the company”. The administrator has wide ranging powers similar to that of a receiver, such as:

(i) the power to remove and appoint directors;

(ii) investigate gratuitous alienations of company property and reduce such transactions;

(iii) to dispose of company property subject to a floating charge, although the charge-holder will have the same priority in respect of the property subsequently acquired through the transaction as he had in respect of that which has been disposed of. Similarly any assets that are subject to a non-floating charge and/or hire-purchase property can also be disposed of, but only with permission of the court, and subject to the security of the relevant creditor(s) being discharged as a result of the disposal

(iv) make distributions to secured and/or preferential creditors during the course of the administration.

(v) make a distribution to unsecured creditors out of the prescribed part (that is, of any ring-fenced sums of money arising out of the abolition of the Crown’s preferential status in insolvency proceedings) and out of realised assets, but in both cases only with the permission of the court.

(vi) make payments to cover the ongoing costs of the administration, including the running costs of the administration, any trading expenses where the administrator elects to trade for a period of time, and one-off payments to creditors where the administrator is of the view that such payments will assist the administration.

Remuneration of the Administrator

Payment is made out of the company property and in priority to any floating charge holder. If the assets are insufficient then it would have been for the administrator to ensure that he had an indemnity from the parties appointing him.

Administrator & Contracts

The administrator is not personally liable for any existing or new contracts that are for the benefit of the company. The moratorium that exists during the administration prevents creditors from enforcing their contractual rights, although it is possible for them to raise court proceedings to obtain payment, provided they can persuade a court that the administrator was unfairly harming their interests. In fact at any point during the course of the administration a creditor or member of the company may apply to the court to challenge the conduct of the administrator if it appears that the administrator is acting, or intends to act, in a way that unfairly harms the interests of the applicant.

So far as employment contracts are concerned the administrator has (in the same way as the receiver has) 14 days from his appointment to adopt the employment contract or not. However no personal liability is incurred where a contract of employment is adopted.

Termination of Administration

A successful administration, where the company is rescued as a going concern, will most likely lead either to a company voluntary arrangement or a scheme of arrangement under the Companies Act 2006. An administration that involves disposing entirely of the business and other assets of the company will require the administrator to arrange for the proper winding up of the company.

Alternatively, the business and/or assets could be disposed of and a distribution made to the secured and/or preferential creditors, with little or no money left over to distribute to the unsecured creditors. As long as the court has given permission to make the distribution to unsecured creditors, these realisations could be distributed and the administrator can then file a notice with the Registrar of Companies, which would move the company from administration to dissolution

One Comment on “…..And So For The Inevitable….”

Very informative read, thanks, was looking around for something to clarify their situation & found this. As a Celtic fan one would expect a “laugh” at our rivals in these tough times, but to be honest I fail to find this whole sorry issue amusing at all.